Infrastructure Bonds Are A Win-Win Instrument For Both Institutions And Investors
IN THE Union Budget, finance minister Pranab Mukherjee proposed infrastructure bonds under Section 80CCF under which individuals can invest up to 20,000 in these bonds. This 20,000 is in addition to the 1 lakh-limit available under Sections C, 80CCC and 80CCD. These bonds can be issued by entities such as LIC, IDFC, IFCI or any other entity classified as NBFC by the RBI. IFCI has taken a lead and is the first financial institution to offer these bonds on a private placement basis to investors.
THE PRODUCT
These bonds will be called long-term infrastructure bonds. They have a tenure of 10 years, with a buyback option after a period of five years.
Accordingly, there are four options under these long-term infrastructure bonds.
Option 1: These are non-cumulative and have a buyback option after five years. Interest here will be paid annually on September 15, every year at the rate of 7.85% per annum. After the end IFCI LONG-TERM INFRA BOND of the 5th year, there will be a buyback option between August 15 to August 31.
Option 2: Interest here will be paid on a cumulative basis, at the rate of 7.85% per annum and compounded annually. There will be a buyback option similar to option 1 mentioned above.
Option 3: Interest at the rate of 7.95% per annum on these bonds will be paid every year, on September 15. However, there will be no buyback option.
Option 4: Interest will be compounded at the rate of 7.95% per annum every year and paid at the end of the tenure. These bonds will not enjoy any buyback option.
KEY FEATURES
The bonds are for tenure of 10 years maturing on September 15, 2020. To avail the benefit under Section 80CCF of the Income-Tax Act, 1961, investments made in the bonds need to be held for a minimum period of at least five years from the deemed date of allotment. Hence, the bonds are transferable only after five years. However, transmission of the bonds to the legal heirs in case of death of the bondholder/ beneficiary to the bonds is allowed. These bonds can also be pledged, hypothecated or given on lien for obtaining loans from scheduled commercial banks after the lock-in period.
The bonds shall be issued in a demat form only. Hence, it is necessary to have a demat account to apply for the same. Investors, who opt and are allotted bonds with a buyback facility and wish to exit through this facility, shall have to apply for a buyback by writing to the company (early redemption notice) of his intention to redeem all the bonds held by him under the buyback option. Such early redemption notice from the bondholder should reach the registrar or the company between August 16 and 31, starting from year 2015 till 2019 (early redemption date) for redeeming of bonds in that particular year.
WHO SHOULD APPLY:
The maximum amount of income not chargeable to tax in case of individuals (other than women assessees and senior citizens) and HUFs is 160,000; in case of women assessees, it is 190,000; and in the case of senior citizens, it is 240,000 for financial year 2010-11. Hence, those whose income exceeds these slabs could apply
WHY TO APPLY:
This limit of 20,000 per annum is in addition to Sections 80C, 80CCC and 80CCD. Hence, it makes sense to apply.
WHY NOT TO APPLY:
The bonds are locked in for five years. So, there is no exit in case you need the money midway. IFCI's past track record has not been that impressive and it has a chequered past. It had carry forward losses till 2008. Although the offering targets retail investors, it is not in the form of a public issue, which necessitates a detailed prospectus with full risk factors.
